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Four Experts Go Shopping For You

February 04, 1996

Special Report

FOUR EXPERTS GO SHOPPING FOR YOU

To help guide the perplexed, here are model portfolios of funds for all sorts of investors

Browsing the vast range of mutual funds is like walking the supermarket aisles. Some of the items are fresh and tasty, some old and stale; some are bargains, some overpriced. And even if you select great food at good prices, your cart may not contain the right mix of ingredients to make a well-balanced meal.

That's why BUSINESS WEEK asked four expert "shoppers," investment advisers who pick mutual funds for their clients, to go shopping for you. We asked our experts to construct portfolios of funds that meet one of the kinds of investment challenges you may face, such as investing for a child's education or finding an optimal mix for your 401(k) plan. One pro invests a six-figure lump sum that's tucked away for retirement. Another invests for a new retiree who wants growth but also needs to generate some spending money now.

This isn't a contest to pick 1996's best-performing funds. Each adviser chooses funds not on forecasts of near-term returns, but because of acumen in such investment areas as emerging-growth companies or foreign stocks.

Sure, over the next year some of these funds might turn in less than sparkling results. It's rare for all kinds of funds to do well at the same time. These portfolios were designed with the current market conditions in mind but intended to fulfill long-term financial objectives. They're not cast in stone. Advisers drop funds as their clients' needs change, the portfolio managers leave, funds switch strategies--or just plain flop.

Here are our advisers' suggested mutual-fund portfolios.

-- COLLEGE FUNDS. It's the most daunting financial hurdle that many families will face. Many have more than one child, and at just the time the parents should start socking it away, there are other needs as well. That's why a college plan must make aggressive investments even if that means some short-term volatility.

Take the case of a three-year-old whose grandparents invest $10,000 in her name. Investment adviser Debra B. Silversmith of Sterling Partners in Denver, a fee-only adviser who uses the funds in the Schwab OneSource network, recommends a portfolio weighted toward funds emphasizing small and midsize companies whose growth prospects are higher than those of companies in the Standard & Poor's 500. "Over time, the higher growth rates should lead to greater fund performance," she says.

That's true, as long as you select funds whose managers are skilled at playing the growth-stock game. As the accompanying table shows, for the 40% of the portfolio dedicated to smaller-company stocks, she chooses Baron Asset and PBHG Growth funds. Baron, which has outperformed its rivals for nearly 10 years, is light on technology stocks. PBHG Growth, unknown until a few years ago, carries a heavy complement of tech stocks--and is run by a veteran growth-stock manager. Silversmith would prefer to have a more equal weighting between the two funds, but PBHG Growth has a $2,500 minimum initial investment. "It's a good time to buy it," she says, noting that because of the tech sell-off, it's down 7% this year. For midsize companies, Silversmith selects the Oakmark and Strong Opportunity funds. Looking abroad, she chooses Warburg Pincus International Equity Fund Common Shares, "a good mix of developed and emerging-market stocks." Adds Silversmith, "If you were going to buy one foreign fund, this is it."

Silversmith thinks this portfolio could earn an average annual return of 14%. If she's right--and that's an ambitious goal--the $10,000 will grow to more than $70,000 when this preschooler turns college freshman. Private college already costs $27,000 a year, so good fund choices are not enough--her parents will need to add money over the years.

-- FUNDS FOR A 401(k). Employees often freeze when asked to choose from five or six investment options in their companies' 401(k) plans. So consider the plight of the General Motors Corp. employees, who can select from among 38 Fidelity mutual funds. That's where adviser James B. Kruzan of Investment Management & Research Inc. in Clarkston, Mich., spotted an opportunity. He has advised some 400 GM employees on fund selection for their 401(k)s.

Take, for instance, a 43-year-old executive who has amassed $50,000 in his 401(k) but has it invested in low-return fixed-income funds. He'd like to have an equity portfolio but hasn't a clue which funds to choose and in what proportions.

Since the employee is 25 years from retirement, Kruzan recommends a fairly aggressive mix he believes should beat the S&P 500 by an average of two percentage points a year: 40% for funds that buy small-cap stocks, 20% for midcap, 10% for large-company, and 30% for foreign stocks. The plan could be fulfilled by scores of funds, not just Fidelity's. But for the GM clients, Kruzan selects from the Fidelity menu. For the most aggressive funds, he chooses Fidelity OTC and Fidelity Small Cap funds. For the midcap slot, he picks Fidelity Blue Chip Growth. "The name is misleading," he says. "It's really a midcap fund." The big-stock slice is a toss-up between Fidelity Growth Company and Fidelity Contrafund.

Kruzan divides the international into four equal parts: Fidelity Canada, Europe, and Pacific Basin funds, and the Diversified International. He would choose Fidelity Japan Fund, but it's not available to the 401(k) plan. But the Pacific Basin fund is 40% invested in Japan, the diversified fund, about 25%.

For ongoing contributions, Kruzan suggests allocating money in the same proportions, with one exception: Split the foreign portion between the more volatile Diversified International and the Pacific Basin funds. "That allows you to use the market's volatility to your advantage by buying more shares at bottoms and fewer at tops," says Kruzan.

-- ROLLOVER IRAs. With companies shrinking payrolls, longtime employees often walk away with six-figure pension distributions and no idea of how to invest them. "That's the kind of help many of our new clients need," says William S. Young of First Financial Group in Towson, Md.

Look at the example of a 50-year-old single woman with $100,000. She's not a gambler, but she is willing to take as much risk as her adviser thinks is appropriate. So Young devised an all-equity portfolio with moderate risk. "With at least 10 years to go before retirement, you can go with an all-stock portfolio," says Young. "In all the 10-year periods since World War II, bonds have beaten stocks less than 10% of the time."

Young earns his pay from commissions--and so chooses load funds. When a fund has front-end or back-end shares, he recommends the upfront "A" or "I" shares, because they're usually most cost-effective for investors over the long term.

Young's prescription is simple: five funds, with near-equal weightings. He eschews the latest highfliers in favor of those that show "consistency of results." The first two holdings, Putnam Fund for Growth & Income A (17%) and Guardian Park Avenue (20%), are "core" funds, with Putnam having a "value" (higher dividend, low price-earnings ratio) approach, while Guardian is more oriented toward growth stocks. He also recommends MFS Research A, a growth fund whose stocks are chosen by research analysts, not portfolio managers. "The fund's not dependent on any one manager's skill," he says. Still, the fund has beaten the market over the past three- and five-year periods. "It's an underappreciated gem."

The remaining 43% of the portfolio goes to SmallCap World and Templeton Foreign I funds. That may appear to be a bit too heavy on foreign stocks. But Young says SmallCap World, despite its name, has only about one-third of its assets abroad. That, combined with Templeton Foreign, puts the portfolio's overseas investments at 30%.

-- EQUITY FUNDS FOR RETIREMENT. Retirement is no reason to drop equity investments. In fact, the longer you hope to live, the more you're going to need them. That's the approach adviser Madeline I. Noveck of Novos Planning Associates Inc. in New York takes in constructing a $500,000 portfolio for a 62-year-old recent retiree.

Noveck works with a large palette of funds, both no-load and load, since that affords more and better investment options. If she uses a load fund, the portion of the commission paid her is credited against her regular asset-based fees.

Noveck's list is long, with 11 funds. But she's working with more money, which usually requires more funds. The client has two needs: about $7,500 a year to supplement his income; and capital appreciation, so there will be enough to fund 20 years or so in retirement. She believes her portfolio can beat the S&P 500 return, but with less volatility.

Like our other advisers, Noveck covers every segment of the stock market. For large-to-midcap stocks, she chooses the Fidelity Advisor Growth Opportunities A and Harbor Capital Appreciation funds; and for small companies, Sierra Emerging Growth A and Third Avenue Value Funds. For foreign investments, she opts for Ivy International A, a large-cap fund focusing mainly on Europe but with some exposure to Japan and emerging markets.

Noveck also places money in funds that don't correlate to the market in general and thus diversify the portfolio. For instance, she allocates 7% to Fidelity Advisor Global Resources A, a gold and natural-resources fund. "When the Dow dropped 165 points in two days, the fund went up," she says. Cohen & Steers Realty Shares and T. Rowe Price International Bond are in the portfolio for the same reasons. Five percent goes to a money-market fund ("choose one with a high yield") both for diversification and liquidity.

The realty fund has another job--to provide current income. That, plus the income from Harbor and Vanguard bond funds, should provide the $7,500 a year the client needs now--with a few dollars to spare. The distributions from the other funds, says Noveck, should be reinvested. That keeps the investor's capital at work for another day.By Jeffrey M. Laderman in New York